Forex Pennant Chart Patterns: What They Are, Examples and Trading

Techniques
Forex pennant chart patterns are important in trading.

No, they’re not going to make you a million bucks, but they can help you trade trends and
pull money out from the market over time.

That’s why we decided to write an in-depth guide about forex pennant patterns.

Below, you’ll find a quick table of contents so you can jump to the topic you’re most
interested in.

 What is a pennant pattern in forex?

 What is a bullish pennant pattern?
 How to identify the bullish pennant pattern
 Where to put your stop loss on bullish pennant patterns
 Bullish pennant pattern target
 What is a bearish pennant pattern?
 How to identify the bearish pennant pattern
 Where to put your stop loss on bearish pennant patterns
 Bearish pennant pattern target
 What is the difference between the pennant and flag patterns?

Let’s start with what a pennant pattern is.

What is a Pennant Pattern in Forex?

The pennant pattern looks like a short triangle bounded by two converging trend lines.

It indicates trend continuation. In other words, if the market has been rising, the pennant
indicates that it will continue to rise, and if it has been falling, the pennant indicates that it
will continue to fall.

A picture is worth a thousand words, right? So, let’s take a look at a picture where you can
see this description in action:

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The pennant on the left-hand side is located in an uptrend while the pennant on the right-
hand side is in a downtrend. In both cases, the pennant signaled a brief pause before the
price resumed its previous trend.

When the preceding price action is upward, the pennant is referred to as bullish pennant because it
foreshadows even higher prices.

Conversely, if the pennant follows falling prices, it’s called a bearish pennant because it
implies that the worst is yet to come.

We’re going to take a closer look at these two types of pennants, beginning with the bullish
pennant.

What is a Bullish Pennant Pattern?

The bullish pennant is a chart pattern that appears when the price consolidates after a large
upward move and forms a tiny symmetrical triangle.

A breakout to the upside from this triangle-shaped consolidation is a signal to buy the
currency pair.

Let us explain.

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We know that a market needs both buyers and sellers to function. When one party is
stronger than the other, a trend will develop in which the price drifts towards the path of
least resistance.

In the case of an uptrend, this path of least resistance is naturally upward.

The uptrend will persist as long as a new equilibrium is reached. That is, when the
imbalance between buyers and sellers is restored.

It’s important to recognize that price adjustments are gradual. They consist of big
directional moves and consolidation phases.

The bullish pennant pattern is essentially the big directional move (the flagpole) combined with a
special type of consolidation (one that resembles a short triangle that you can identify with two
converging trend lines).

This pattern is referred to as bullish because it foreshadows higher prices. It suggests that
sellers were unable to turn the market around, and buyers are simply taking a breather
before resuming the uptrend.

The terminology originates from Wall Street where an investor who bets on higher prices is
referred to as “bullish.”

Now that you know what a bullish pennant pattern is, let’s learn how to identify it. We put
together a quick checklist below.

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How to Identify the Bullish Pennant

The formation of a bullish pennant pattern in forex involves the following steps:

1. There is an uptrend leading to the pattern. You want to see the market printing several
bullish candles with little to no retracement.

2. Once the large price movement subsides, a period of consolidation begins.

3. The consolidation phase is shaped like a pennant. This happens when the price makes lower

4. highs and higher lows within a narrowing range.

5. The bullish pennant pattern is completed when there is a breakout from the pattern to the
upside. Only then should you consider taking a position in the currency pair.

The chart below provides an excellent opportunity to review the identification guidelines.
The bullish pennant pattern is clear with the price action narrowing over time until a green
candle eventually closes outside the pennant.

Notice how the market continued to reach higher and higher prices after the bullish
pennant hinted that the cooling trend may be ready to reignite.

Keep reading if you’re interested in looking at trading techniques and more examples of the
bullish pennant forex pattern.

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Where to Put Your Stop Loss on Bullish Pennant Patterns

One of the first questions that comes to mind when planning a bullish pennant trade is that
of the stop loss.

A stop loss is simply an order you place with your broker to close your position if it moves
against you by a predetermined amount.

An obvious place for your stop loss is just below the pennant. This will allow you to play the
pattern and quickly get out if the market reverses.

The size of the pennant is an important factor to consider. If the pennant is very small, you
may want to add a few more pips to your stop loss to avoid being stopped out by a random
price swing.

If you want to stay in the position for a longer time, you might also just place your stop
below the most recent support level. You will have to use a smaller position size, but you
will also be less likely to get stopped out.

On the flip side, if you want to be really aggressive you can use the bottom of the breakout
candle as your stop loss level.

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This technique can be ideal for a scalping strategy because it allows you to maximize your
leverage and squeeze the most money out of each pip movement.

Another popular method is setting the stop loss based on market volatility. This means you
check the average market movement on your timeframe and set your stop loss at a multiple
of that figure.

There’s a handy volatility calculator on BabyPips that you can use for this purpose.

For example, the screenshots above are taken from the hourly GBP/USD chart. This pair has
an average hourly pip fluctuation of 27 pips according to BabyPips.

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Using this information, you could place your stop loss at a distance where it is protected from
ordinary price swings.

This guide belongs to ForexSpringBoard.com. Do not copy.

You can see that th stop loss is located 30 pips below the entry price to take into account
market volatility.

Bullish Pennant Pattern Target

After ensuring that your risk on the trade is at a minimum, the next logical step is to
maximize your profit potential.

To that end, let’s take a look at a few possibilities for the bullish pennant pattern target
price.

One advantage of chart patterns like the pennant is that they provide a “built-in” price
target. This is sometimes called the measure rule.

The way it works is very straightforward.

Simply take the difference between the top of the pennant and the flagpole low. Add this
value to the low of the breakout candlestick at the pennant end to get the price target.

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This strategy is especially useful for traders trying to lock in a quick profit because the profit
objective set this way will be fairly close to the entry price.

Another popular method is to target the closest resistance level.

Note that if the resistance is close, the risk-reward aspects of the trade may be unfavorable,
and you should probably pass until a better opportunity presents itself.

Some traders use a fixed ratio to get around the problem of insufficient risk-reward. For
example, they could use a strategy we covered earlier to calculate their stop loss, and then
set their profit objective to 2x, 3x, or 5x the risked amount.

This has the advantage of simplicity, but it overlooks the market structure, which might
occasionally backfire.

It’s worth mentioning that not all traders use one profit target. You might set multiple profit
targets based on different prices. Here, taking profits is done in a methodical manner, with
X percent of your position closed each time the market reaches one of your targets.

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Besides, some traders choose not to set profit targets at all. They let the market decide
when they take profit. If you find this approach sympathetic you might wait for a reversal
chart pattern as a trigger for closing your trade.

Now that you know how to read a bullish forex pennant pattern, it’s time to learn how to
read a bearish one.

What Is a Bearish Pennant Pattern?

If the bullish pennant is considered “the pennant,” the bearish pennant is a reverse pennant
pattern.

The bearish pennant is a chart pattern that appears when the price consolidates after a
large downward move and forms a tiny symmetrical triangle.

A breakout to the downside from this triangle-shaped consolidation is a signal to sell the
currency pair.

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We already highlighted that a market needs both buyers and sellers to function. It is the
imbalance between the power of buyers and sellers that gives rise to trading opportunities.

Unlike the bullish pennant, the bearish pennant forms in a downtrend, meaning that sellers
overwhelm buyers.

This also means that prices will fall until a new equilibrium is found. That is, once the buyer-
seller balance has been restored.

No one knows exactly where that will happen. The key

is to recognize situations when the market seems to
have leveled out but then signals that the price
adjustment will continue.

The bearish pennant is an excellent chart pattern

that represents situations just like that.

After a significant price drop, the subsequent

consolidation forms a triangle that can be
identified by two converging trend lines.

The combination of the drop and the triangle resembles a pennant on a flagpole, hence the
name. It is referred to as a bearish pennant because it predicts lower prices, much like those
pessimistic Wall Street investors known as bears.

How to Identify the Bearish Pennant

The following steps are involved in the formation of a bearish pennant pattern in forex:

1. The pattern is preceded by a downward trend. The market should print several bearish
candles with little to no pullback.

2. A period of consolidation begins once the large price movement has subsided.

3. The consolidation phase has a pennant-like shape. This happens when the price makes
lower highs and higher lows in a narrowing range.

4. The bearish pennant pattern is completed when there is a downside breakout from the
pattern. Only then should you consider trading the currency pair.

The chart below is a great way to go over the identification guidelines again. The bearish
pennant pattern is clearly visible, with price action narrowing over time until a red candle
closes outside the pennant.

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Take note of how the market continued to fall after the bearish pennant signaled that the
cooling trend was about to resume.

Continue reading if you want to learn more about trading techniques and see more
examples of the bearish pennant forex pattern.

Where to Put Your Stop Loss on Bearish Pennant Patterns

When planning a bearish pennant trade, or any other trade for that matter, risk
management should always be at the forefront of your mind.

Since the stop loss is one of the most effective risk management tools, it’s natural to want
to know where to put it in case of a bearish pennant trade.

A general rule of thumb is to put your stop loss just above the pennant. This will enable you
to trade the pattern while exiting swiftly if the market reverses.

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As previously stated, the size of the pennant is critical because small patterns will have the
stop loss too close to the entry price, resulting in frequent stop outs.

You might counter this by adding a few pips of additional buffer to your stop.

If you want to stay in the position for a longer period of time, you can simply set your stop
above the most recent resistance level. You’ll need to use a smaller position size, but you’ll
be less likely to get stopped out.

On the other hand, if you want to be really aggressive, you can set your stop loss at the top
of the breakout candle. This technique can be ideal for a scalping strategy because it allows
you to open a large position size and amplify the value of each pip movement.

Last but not least, in the bullish pennant section, we mentioned using volatility for stop
placement. This technique also works for the bearish pennant forex pattern.

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Bearish Pennant Pattern Target

Risk management is important, but so is planning for a successful exit. So, let’s look at a few
different target prices for the bearish pennant formation.

To begin, the bearish pennant pattern also comes with a “built-in” target price that you can
easily uncover using the previously introduced measure rule.

It works like this:

Simply take the difference between the bottom of the pennant and the flagpole high.
Subtract this value from the high of the breakout candlestick at the pennant end to get the
target price.

This can be an ideal day trading strategy because the profit objective will be relatively close
to the entry price.

Another popular technique involves aiming for the closest support level. However, be aware
that this may result in unfavorable risk-reward ratios. In this case, it is best to wait until a
better opportunity arises.

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You may also find it appealing to use a fixed risk-reward ratio, which is another popular
technique for setting the target price for the bearish pennant pattern.

This might involve shooting for 3x your risked amount like we did with our triangle pattern
trading strategy.

(By the way, if you’re interested in developing trading strategies, you should definitely read
that article.)

In case you prefer to take partial profits, another excellent technique is to set multiple profit
targets based on different prices. As the price moves in your favor, you gradually close out
portions of your position as illustrated below:

Finally, if you want complete flexibility, you can use no profit targets at all. Instead, hold the
position as long as possible and only exit if the trend appears to be preparing to reverse.

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What Is the Difference Between the Pennant and Flag Patterns ?
The difference is in the form of the consolidation. Instead of two parallel trend lines, the
pennant pattern is bounded by two converging trend lines.

Aside from that, pennant and flag patterns are the same in that they both indicate a
temporary exhaustion before the market resumes its trend.

The oblique implication of this distinction is that, in the case of the pennant, the market
exerts a less intense effort to reverse the trend.

While knowing these nuances is useful, don’t overthink it. The key is to understand what
market condition causes these formations. It makes little difference whether a pattern is
technically a pennant or a flag.

In any case, patterns are subjective, so what you might call a pennant may be interpreted
as a flag by another trader.

The important thing to remember is that formations like pennants, flags, and wedges
appear when volatility is compressed. This indicates a decrease in market activity, which is
frequently a sign that the market is taking a breather before continuing on its previous
trend.

Forex Pennant Patterns Frequently Asked Questions

What are forex pennant patterns in simple terms?

Forex pennant patterns are continuation patterns. They form on a chart when the price
makes a large up or down move and then consolidates between two converging trend lines.
The end of the consolidation is usually followed by the continuation of the preceding trend.

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What is a bullish pennant pattern?

The bullish pennant is a chart pattern that appears when the price consolidates after a large
upward move and forms a tiny symmetrical triangle. A breakout to the upside from this
triangle-shaped consolidation is a signal to buy the currency pair.

Where do I put the stop loss on forex pennant patterns?

In the case of a bullish pennant, bet on higher prices. To protect against a sudden price
drop, set the stop loss below the pennant. In the case of a bearish pennant, bet on lower
prices. To protect against a sudden price jump, set the stop loss above the pennant.

What is the difference between a flag and a pennant?

The difference is in the form of the consolidation. Instead of two parallel trend lines, the
pennant pattern is bounded by two converging trend lines. Aside from that, pennant and
flag patterns are the same in that they both indicate a temporary exhaustion before the
market resumes its trend.

Conclusion

We hope this guide gave you a good overview of forex pennant chart patterns.

If you are still unsure about certain aspects of these formations, send us a message and we
will respond as soon as possible and do our best to help you.

If you find this guide useful, please share it on social media so that other traders can benefit
from it as well.

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